If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.

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Quizplus · Accepted Answer

This is because compounding more frequently typically results in a higher effective annual yield, as the interest earns interest more frequently. Quarterly compounding means that interest is added four times a year, while monthly compounding means that interest is added twelve times a year. Therefore, the bond with quarterly compounding will have a higher effective annual yield despite both bonds having a simple interest rate yield of 9 percent.

If There Are Two Bonds with a Simple Interest Rate